India Cements 3QFY2014 performance highlights and results update

For 3QFY2014, India Cements (ICEM) operating performance was ahead of our estimates. The company posted a net profit of 0.4cr during the quarter (vs our and consensus estimate of a loss) due to better-than-expected cement realization. Realization was higher by 1.4% on a yoy basis (up 7.8% on a sequential basis).

OPM down 388bp yoy: ICEM’s top-line declined by 4.2% yoy to Rs.1,037cr. The Cement business posted a 4.3% yoy decline in sales to Rs.1,012cr as volumes declined by 5.2% yoy due to poor demand scenario in the company’s key markets in South India due to monsoons and low sand availability (in Tamil Nadu). The company had carried out price hikes in the beginning of the quarter which pushed up the realization for the quarter. However, price hikes could not be sustained till the end of the quarter. Despite marginal improvement in realization, the EBITDA of Cement business fell by 31.5% yoy to Rs.108cr due to increase in freight and power & fuel costs. A reasonably healthy performance in the Shipping and IPL franchise business contributed to a better-than-expected bottom-line performance. While the shipping business posted a 15.4% yoy growth in EBITDA to Rs.9cr, the operating losses of the IPL franchise reduced to Rs.2.4cr (vs operating loss of Rs.8.8cr in 3QFY2013).

Outlook and valuation: We expect ICEM’s return ratios to remain subdued due to substantial investments in subsidiaries. Although the stock appears cheap at an EV/tonne of US$47on FY2015E capacity, we believe the valuation is justified considering the unfavourable location of its plants. Hence, we maintain our Neutral recommendation on the stock.